2025 (7) TMI 148 - AT - Service Tax

Classification of services - Manpower Recruitment and Supply Agency Services or not - place of provision rules - reverse charge mechanism - extended period of limitation. Whether Daimler AG is providing Manpower Recruitment and Supply Agency Services to the Appellant under Section 65(105)K of the Finance Act 1994 prior to 01-07-2012 and is providing taxable services under Section 65B(44) of the Finance Act 1994 post 01-07-2012 and consequently the Appellant is liable to pay service tax under Section 66A of the Act ibid read with applicable provisions of Service Tax Rules and Place of Provision Rules? - HELD THAT - The issue whether the overseas group company or companies with whom the assessee has entered into agreements provide it manpower services for the discharge of its functions through seconded employees has come up for analysis by the Honourable Supreme Court in its decision in C.C CE S.T. Bangalore (Adjudication) v. Northern Operating Systems Pvt Ltd 2022 (5) TMI 967 - SUPREME COURT wherein the Apex Court has after noticing the relevant provisions of the Finance Act 1994 with amendments as they were prior to 01-07-2012 and post the amendments in 2012 with effect from 01-07-2012 upon extensive deliberations concluded for the reasons given therein that the respondent therein i.e. the assessee was the service recipient of manpower recruitment and supply services provided by the overseas entity in regard to the employees it seconded to the assessee for the duration of their deputation or secondment. In the instant case the Appellant has contended that the aforesaid decision of the Apex Court would not apply to the facts and circumstances of the appellant s case whereas the Revenue has contended that the appellant s case would be covered by the ratio of the decision of the Apex Court in Northern Operating Systems (NOS Judgement) and thus the demand is sustainable. As regards the contention that in Northern Operating Systems the foreign Company had created a pool of employees who are deployed to various affiliate companies to perform tasks in relation to business of the foreign group entity and that there is no such pool of employees created in the present case and employees are engaged in relation to business of the Appellant and not the foreign Company again the same remains an averment sans any evidence given the absence of the going global policy or the global mobility policies as well as the detailed appointment letter of the employee. In any event in our view irrespective of whether a pool is created or not the fact remains that it is the Home Company who upon receiving the specification of the employee desired by the Appellant determines the transferee who is to be made available by indicating the current salary and family status of the transferee. Thus this distinction sought to be pointed out is rather rendered immaterial as the factum remains that who would be the transferees who are offered to be supplied are only chosen as decided by the Home Company. When the entitlement to availment of credit or entitlement to refund etc. would arise only subsequent to the discharge of such revenue liability in the first instance; such availment of cenvat credit or entitlement to refund also being subjected to further checks and balances in terms of the statutory requirements that has to be fulfilled to qualify for the same the Honourable Apex Court has decided not to entertain the plea of revenue neutrality when holding that the liability has to be necessarily discharged. The appellant has also placed reliance on a number of decisions to contend that the entitlement to cenvat credit results in a revenue neutral situation and thus the demand need not be sustained. The crucial distinction that we note is that in all these decisions the fact situation was not pertaining to the liability that arises consequent to the levy attracted under Section 66A of the Finance Act 1994 for import of service. To countenance the plea of the appellant would be to render the discharge of liability consequent to levy under Section 66A completely otiose as no person who is liable thus need to pay service tax on service received from abroad for the reason that the tax so paid will be available as credit to them. The Appellant was the service recipient for service (of manpower recruitment and supply services) by the overseas entity in regard to the transferees/employees it seconded to the appellant for the duration of their deputation or secondment. Therefore Daimler AG is providing Manpower Recruitment and Supply Agency Services to the Appellant under Section 65(105)K of the Finance Act 1994 prior to 01-07-2012 and is providing taxable services under Section 65B(44) of the Finance Act 1994 post 01-07-2012 and consequently the Appellant is liable to pay service tax under Section 66A of the Act ibid read with applicable provisions of Service Tax Rules and Place of Provision Rules. Whether extended period of limitation can be invoked in the facts and circumstances of the case? - HELD THAT - There are no existence of wilful suppression of facts or deliberate misstatement in these instances. For these reasons the Revenue was not justified in invoking the extended period of limitation to fasten liability on the appellant. Therefore respectfully following the said Judgement of the Honourable Supreme Court in the case of Northern Operating Systems the impugned common Orders-in-Original upheld except to the extent it seeks to recover amounts for the extended period of limitation and imposes penalties. The penalties imposed are set aside. The demands now stand modified excluding any liability for the extended period of limitation and the demands are confined only to the normal period along with applicable interest thereon. Appeal disposed off.

Summary

The core legal questions considered by the Tribunal in these appeals are as follows:

(1) Whether the foreign group company, by seconding expatriate employees to the appellant company in India, is providing taxable Manpower Recruitment and Supply Agency Services under the Finance Act, 1994, and consequently whether the appellant is liable to pay service tax under the reverse charge mechanism (RCM) for such imported services for the relevant periods?

(2) Whether the extended period of limitation can be invoked by the Revenue for recovery of service tax demands in the facts and circumstances of the case?

(3) Whether the payments made by the appellant to the foreign group company for the seconded employees constitute consideration for taxable services or are merely reimbursements not liable to service tax?

(4) Whether the appellant is entitled to claim Cenvat Credit on the service tax paid, rendering the demand revenue neutral?

(5) Whether interest and penalties are chargeable on the confirmed demands?

Issue-wise Detailed Analysis

1. Nature of Services and Liability to Pay Service Tax on Imported Manpower Services

Legal Framework and Precedents: The Finance Act, 1994 defines "manpower recruitment or supply agency service" under Section 65(105)(k) (pre-1.7.2012) and "service" under Section 65B(44) (post-1.7.2012). Section 66A mandates payment of service tax on import of services under RCM. The Supreme Court in Commissioner of C.Ex., CE & ST, Bangalore v. Northern Operating Systems Pvt. Ltd. (2022) 17 SCC 90 (hereafter NOS Judgment) held that secondment of employees by foreign group companies to Indian entities amounts to provision of manpower supply services, taxable under the Finance Act, 1994.

Court's Interpretation and Reasoning: The Tribunal examined the Framework Agreements for International Transfers of Employees (FAITEs) and separate employment contracts. The FAITEs provide for dual employment: the seconded employee remains on the payroll of the foreign "Home Company" with employment made inactive during secondment, while simultaneously entering into a separate employment contract with the Indian "Host Company" (the appellant). The Host Company exercises operational control and supervision over the employees during secondment. The costs of transfer, including salary and benefits, are borne by the Host Company. The Home Company pays a portion of salary in foreign currency on behalf of the Host Company, which is reimbursed on a cost-to-cost basis.

The Tribunal noted that despite the dual employment, the predominant employer-employee relationship remains with the Home Company, which retains the lien on employment and fulfills statutory obligations such as social security contributions. The Host Company controls the work and bears economic liability for the employees during secondment.

Applying the NOS Judgment, the Tribunal held that the foreign Home Company provides manpower recruitment and supply services to the appellant, which is the service recipient liable to pay service tax under RCM. The Tribunal rejected the appellant's contention that the arrangement constituted a direct employer-employee relationship with the Host Company exempting the transaction from service tax. The Tribunal emphasized that the true nature and substance of the contract, not its form or nomenclature, governs taxability.

Key Evidence and Findings: The FAITEs and employment contracts, job descriptions, salary payment mechanisms, and operational control demonstrated the secondment arrangement's nature. The absence of mark-up in reimbursement did not negate the existence of consideration for the service. The appellant's failure to produce the Going Global Policy or Global Mobility Policy, which governed the transfers, weakened its case.

Treatment of Competing Arguments: The appellant relied on the "employer-employee" exemption and distinguished NOS on grounds of factual differences, such as absence of a pool of employees and that employees worked solely for the Indian entity. The Tribunal found these distinctions immaterial, as the NOS Judgment mandates a fact-based analysis and the appellant failed to provide evidence substantiating these differences.

Conclusion: The appellant is liable to pay service tax on imported manpower supply services from the foreign group company under Section 65(105)(k) (pre-2012) and Section 65B(44) (post-2012) read with Section 66A of the Finance Act, 1994.

2. Extended Period of Limitation

Legal Framework and Precedents: The Proviso to Section 73(1) of the Finance Act, 1994 allows invoking extended limitation period in cases of willful suppression of facts. The Supreme Court in NOS Judgment held that invocation of extended limitation period was not justified in similar facts.

Court's Interpretation and Reasoning: The Tribunal found that the appellant's liability was debatable and there was no evidence of willful suppression or mala fide intent. The appellant had a bona fide belief that service tax was not payable on the reimbursed salary portion. Therefore, extended limitation could not be invoked against the appellant.

Conclusion: The extended period of limitation is not invokable in the present case; demands are confined to the normal period.

3. Consideration and Reimbursement Issue

Legal Framework and Precedents: Section 67 of the Finance Act, 1994 defines "consideration" to include any amount payable for taxable services. The Supreme Court in Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India (2018) 4 SCC 669 held that reimbursable expenses incurred as a pure agent are excluded from taxable value. The Tribunal in Principal Commissioner of CGST, Delhi South v. Boeing India Defense Pvt. Ltd. (2023) upheld this principle for reimbursable expenses unrelated to salary. The NOS Judgment clarified that payment of salary reimbursements to foreign group companies is consideration for manpower supply services.

Court's Interpretation and Reasoning: The appellant contended that the amounts paid to the foreign company were mere reimbursements without markup and hence not consideration. The Tribunal rejected this, noting that the Home Company's payment of a portion of salary on behalf of the appellant is not a pure agency reimbursement but a fulfillment of the Home Company's statutory obligations. The entire salary package, including foreign currency payments, forms part of the gross consideration for the manpower supply service. The Tribunal held that the appellant's payments constitute consideration for taxable services and cannot be dissected or vivisected to exclude portions paid in foreign currency.

Conclusion: The payments made by the appellant to the foreign group company for seconded employees constitute consideration for taxable manpower supply services and are liable to service tax.

4. Revenue Neutrality and Cenvat Credit

Legal Framework and Precedents: The appellant claimed that payment of service tax would be revenue neutral as it is entitled to Cenvat Credit. Various decisions including Flemingo Duty Free Shop Pvt. Ltd. v. Union of India (Madras HC) and others were cited to support this position.

Court's Interpretation and Reasoning: The Tribunal acknowledged the entitlement to Cenvat Credit but held that discharge of service tax liability cannot be avoided on grounds of revenue neutrality. The Supreme Court in NOS Judgment emphasized that the incidence of taxation is distinct from the entitlement to credit or refund and that the liability to pay service tax arises irrespective of credit availability.

Conclusion: The appellant's claim of revenue neutrality does not absolve it from paying service tax liability under the Finance Act, 1994.

5. Interest and Penalty

Legal Framework: Interest under Section 75 and penalties under Sections 76, 77, and 78 of the Finance Act, 1994 are leviable for non-payment or short payment of service tax.

Court's Interpretation and Reasoning: The Tribunal found no willful suppression or deliberate misstatement by the appellant and held that the appellant's view on tax liability was debatable and bona fide. Therefore, penalties were set aside. Interest was confirmed for the period of delay as per statutory provisions.

Conclusion: Interest is payable on confirmed demands; penalties are not imposable in the facts of the case.

Significant Holdings

"The nomenclature of any contract, or document, is not decisive of its nature. An overall reading of the document, and its effect, is to be seen by the Courts."

"The assessee was, for the relevant period, service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, or a taxable service, for the two different periods in question."

"The invocation of the extended period of limitation in both cases, by the revenue is not tenable."

"The liability to pay service tax consequent to the levy attracted under Section 66A, cannot be extinguished on the plea of revenue neutrality."

"The payments made by the appellant to the foreign group company for the seconded employees constitute consideration for taxable manpower supply services and are liable to service tax."

"The penalties imposed are set aside as the appellant's view on liability was bona fide and not mala fide."

The Tribunal upheld the demands of service tax under the Finance Act, 1994 on the imported manpower supply services provided by the foreign group company to the appellant under the reverse charge mechanism for the normal period. The extended period of limitation invoked by the Revenue was held unjustified and set aside. Penalties were also set aside for lack of willful suppression. Interest was confirmed as per law. The appellant's contention that the payments were mere reimbursements without consideration was rejected. The Tribunal followed the Supreme Court's authoritative decision in Northern Operating Systems Pvt. Ltd. and applied the substance-over-form test to hold the foreign company as providing taxable manpower supply services. The appellant's claim of revenue neutrality and entitlement to Cenvat Credit did not absolve it from discharge of service tax liability. The appeals were disposed of accordingly.